The Bank of England will inject £150bn more stimulus into the UK economy to help it handle a new England-wide lockdown, and predicted that growth would go into reverse in the final three months of the year.
The big increase in bond-buying – which came as the BoE left interest rates untouched at 0.1 per cent – will take the total quantitative easing (QE) package to £895bn. It was more generous than the £100bn analysts had expected.
The central bank also significantly downgraded its economics forecasts. It now thinks the economy will not regain its pre-coronavirus size until the first three months of 2022. It had previously expected a full rebound by late next year.
It expects the economy to shrink 11 per cent in 2020, down from the 9.5 per cent fall predicted in August.
The Bank predicted the economy would grow slower next year, expanding only 7.25 per cent, down from an earlier estimate of nine per cent growth.
The new figures took into account the England-wide lockdown announced by Prime Minister Boris Johnson on Saturday. It came into effect today, closing non-essential shops, restaurants, pubs and gyms for a month.
Chancellor Rishi Sunak’s extension of the furlough and new job support scheme will limit some of the damage, the Bank said.
But it nonetheless predicted unemployment would rise sharply to peak at around 7.75 per cent in the second quarter of next year, up from 3.9 per cent before Covid.
Bank sharply downgrades growth predictions
Governor Andrew Bailey said that “Covid-19 and the actions to contain it” have had a “dramatic and rapidly changing impact” on the UK economy.
In light of the new lockdown, the BoE now expects the economy to shrink by two per cent in the final quarter.
Bailey said a two per cent drop “may not sound that dramatic”. But he said the UK economy was already nine per cent smaller than a year earlier in the third quarter. “In history, nine per cent is a huge number,” he said.
Unemployment is now set to be higher in both 2021 and 2022, at 6.75 per cent and five per cent.
Many firms ‘not ready’ for Brexit
The Bank altered its tone on Brexit, flagging that the UK leaving the single market and customs union would hit trade.
It said it expected a trade agreement to be reached. Yet it predicted the transition would cause a hit of one per cent to GDP in the first quarter of 2021.
Bailey said that around 30 per cent of British companies were not ready.
This unpreparedness will have the “most significant impact” on trade and activity, the Bank said. Yet it said it expects companies to be more up to speed by the second quarter.
Bank goes bigger than expected on QE
The Bank surprised the markets with a unanimous vote for a £150bn package, which was bigger than expected.
Bailey said Bank studies had shown there were benefits to “acting more rapidly and at scale… response to high uncertainty”.
Sterling jumped one per cent against the dollar to $1.308 by the early afternoon. It was helped by a falling dollar amid US election uncertainty. Government bond yields rose.
The Bank did not consider cutting interest rates into negative territory. Bailey said research on the issue is still ongoing and “there’s nothing further to report on that”.
However, with borrowing costs close to record lows, some analysts questioned the effectiveness of more QE.
“The messaging is likely to prove more powerful than the policy change itself,” said Andrew Goodwin of Oxford Economics.
“We think monetary policy is reaching the limits of its effectiveness.” He said these purchases “will occur over a longer period, merely maintaining the current level of support”.